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Tag: trade deficit

Concerned with how trade is commonly discussed, Greg Mankiw recently issued a plea to journalists to halt the use of subjective terms to describe trade flows. Rather than words such as “deteriorated” or “improved,” the Harvard economics professor (and noted textbook author) proposes that writers employ more objective language such as “the trade balance moved towards surplus.”

Mankiw’s plea is fine as far as it goes, but it probably doesn’t go far enough. The problem in the way trade is discussed lies not only in the descriptions applied, but the nouns themselves.

To speak of trade surpluses or deficits is utterly nonsensical, or at the very least a corruption of the term “trade” that incorrectly uses it as a synonym for “exports.” Trade, however, comprises both selling and buying, both exports and imports. The amount of trade between two countries (or any other group of entities) is the sum of their exports and imports. Given that both sides engage in the same amount of bilateral trade—that is to say, the same total of exporting and importing—a trade deficit is a mythical beast and logical impossibility. Perhaps we can speak of net exports or net imports, or export deficits and import surpluses as well as their reverse, but “trade deficit” should be regarded as a term devoid of real meaning.

Talk of a trade balance either being in surplus or deficit is problematic for similar reasons. Occasionally, one may encounter the descriptor “positive” applied to the trade balance if exports exceed imports and “negative” if the opposite occurs. But—as with trade deficits and surpluses—this is completely arbitrary. It makes no more sense to say this than to characterize a surplus of imports as positive or exports exceeding imports as negative.

This is no exercise in pedanticism. Precision of language is important. Terms matter, and the way in which trade is discussed influences how it is perceived. One can’t help but wonder how many people have an irrational fear of imports because they are said to contribute to a “trade deficit” or a “negative trade balance”—terms laden with unfavorable connotations. It’s not difficult to imagine that U.S. trade policy would be on a very different trajectory if President Trump spent his formative years in a world that did not speak of trade deficits and instead used more exact language and terms.

It may be too late for Trump, but a change in terminology could go a long way toward improving the conversation around trade and clearing the path for better policy.

As Dan noted, President Trump has been in Asia, making a state visit to China and then meeting with foreign leaders at an Asia-Pacific Economic Cooperation forum in Vietnam. As part of the trip, and perhaps in an effort to recapture his populist mojo amidst cratering job approval numbers back home, he has remounted one of his favorite hobby horses: decrying “unfair trade deals” that he says put America at a disadvantage with its trading partners.

The president does make oblique references to barriers that other countries place on American products entering their markets. But his comments suggest his biggest concern is the large trade deficits the United States has with some countries. According to Trump, those deficits are all the proof necessary that America is being snookered, and that current trade arrangements should be dissolved and renegotiated.

“The United States really has to change its policies because they’ve gotten so far behind on trade with China and, frankly, with many other countries,” he said in a press conference with President Xi in China. “The current trade imbalance is not acceptable,” he told reporters in Vietnam, adding: “I do not blame China or any other country, of which there are many, for taking advantage of the United States on trade. If their representatives are able to get away with it, they are just doing their jobs. I wish previous administrations in my country saw what was happening and did something about it. They did not, but I will.”

But if a trade deficit—especially a large, persistent one—is proof positive of unfair dealing, then Trump has some things to discuss with U.S. authorities about his own business empire, the Trump Organization.

Consider the tenants in his office, retail, and condo complexes, the lodgers at his hotels, and the players on his golf courses. They spend hundreds of dollars a day and thousands or millions of dollars a year on Trump products. Yet it’s highly doubtful that the Trump Organization simultaneously purchases hundreds of dollars a day or thousands and millions of dollars a year in goods from those same customers. Those customers thus have huge trade deficits with the president and his businesses. By his own logic, the Trump Organization must be treating those customers unfairly.

But wait, the president might protest, that’s not right—his businesses may not buy things from his customers, but the Trump Organization buys things from other businesses, and those businesses buy from other businesses, and sooner or later the money winds its way back to his customers.

But people in foreign countries likewise use American dollars to buy things from other countries, and invest in other countries, and some of that money winds its way back to the United States, too. Besides, even if China were to keep every U.S. dollar it receives and tuck them all away in some giant mattress, that would hardly reduce the number of dollars the United States can spend on domestic goods—after all, we own printing presses! Meanwhile, as all those dollars whirl around or get tucked away, the United States receives more and more Chinese goods—goods that we value more than the dollars we exchange to purchase them.

Unfortunately, the president ascribes to a very simplistic—and wrong—understanding of trade. The next time he launches in on the horrors of U.S. trade deficits, I hope someone asks him if there’s also a problem with the imbalanced trade the Trump Organization has with its customers.

As The Wall Street Journal notes, “Mr. Trump and his advisers see the U.S. goods trade deficit as an indicator of U.S. economic weakness.”

Yes, they do. But why? As the graph clearly shows, the real gross output of U.S. manufacturing rises when the goods trade deficit (both measured in 2009 dollars) is also rising. When trade deficits fall, so does U.S. manufacturing. Sinking industries need fewer imported parts and materials, and their unemployed workers can’t afford imports.

Measured in 2009 dollars, the goods trade deficit fell from $863.4 billion in 2006 to $525.2 billion in 2009. Peter Navarro, the President’s liberal protectionist trade adviser, would apparently call that good news. The rest of us called it The Great Recession.

The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.

Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.

So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.

To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports. Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP. But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses. What the data show is much different – the exact opposite in fact.

William Galston’sWall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why U.S. employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year. He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.” But “up to” 20% explains very little, and that figure is at the high end of a range of estimates about 1999-2011 from a working paper by David Autor, David Dorn and Gordon Hanson. They speculate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011. In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011. Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions. Although Autor, Dorn and Hanson emphasize imports of consumer goods (clothing and furniture), nearly half of U.S. goods imports (47.7% last year) are industrial supplies and capital goods which are essential inputs into expanding U.S. production. That is a big reason why imports rise when U.S. industry expands and fall in slumps.

Even if “up to” 20% of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of U.S. jobs were reduced. “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].” Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services – such as financial and legal services, accounting, advertising, travel, telecom and insurance. Services account for 32% of U.S. exports, and the U.S. runs a large and growing trade surplus with China ($28 billion in 2014) and with the world ($233 billion). Dollars foreign firms earn by exporting goods to the U.S. are commonly used to import services from the U.S. or to invest in U.S. real and financial assets; both those activities create U.S. jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage U.S. exporters.

Confining the job impact to traded goods also excludes U.S. jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon…), as well as shipping U.S. exports to China and Hong Kong. Incidentally, the U.S. ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted trade with China though it really is.

Galston acknowledges that “rising productivity” [output per worker] is “part of the story” about manufacturing jobs. In fact, it is essentially the whole story from 1987 to 2007, when U.S. manufacturing output nearly doubled. The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade.

“Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions.

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn).